How Greece’s Debt Issues Are Becoming A Global “Black Hole” (EWG, EWJ, VGK, GS, DB)

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September 20, 2011 9:35am NYSE:EWG NYSE:EWJ

Jon D. Markman: The extremely volatile markets of late stem in part from news  suggesting Greece’s debt issues have made a default imminent – creating a  global black hole that’s sucking in a growing number of other economies with  it.

Default fears intensified last Friday when European finance ministers announced they would delay a decision on whether or not Greece was eligible for its sixth tranche of bailout funds. Greece was scheduled to get  the next $11 billion (8 billion euros) installment of its $152.6 billion (110  billion euros) aid package by the end of September, but now must wait at least  until October.

European Union (EU) and International Monetary Fund (IMF)  inspectors met with Greek Finance Minister Evangelos Venizelos last night to  evaluate the country’s progress with austerity measures. Greece agreed to  reduce its deficit to 7.5% of gross domestic product (GDP) this year, and below  3% by 2014 in order to receive bailouts from the IMF and other euro nations.

But investors are afraid the country will run out of cash  before a bailout decision is reached.

Greece may not be going down to a Trojan-level defeat in the  next few days, or even weeks, but there is little doubt that the country cannot  afford to remain harnessed to the euro. It faces almost certain default at this  point, sad to say, which means that some big banks, shareholders and  bondholders are going to suffer.

Perhaps those Eurozone critics who said that a currency  union not backed by taxation or bond-issuing authority was a bad idea should  have been heeded. Then countries like Greece would not have been encouraged  into a currency union that’s an ill-suited match for its unique economy,  history and ambition.

Now the critics are being proven largely right,  unfortunately.

The most dangerous thing is new evidence that the debt  crisis continues to spread.

Looks like France is headed down the same path as Italy and  Spain. According to a Bloomberg News story last week, France  may need new austerity measures to avoid a bond sell-off and credit rating  downgrade.

It seems that Nicolas Sarkozy is the new Silvio Berlusconi.

Greece’s Debt Issues Now a Global Infection

Bank  stocks keep tumbling as investors flee from the financial sector, fearing  banks’ exposure to Greek debt. The European STOXX bank index plunged 10% last  week and the German (NYSE:EWG) stock market index, called the DAX, fell 7%.

As the accompanying chart illustrates, in the past four  months Societe Generale SA (PINK ADR:SCGLY) has lost 66% in  the Paris market, Barclays PLC (NYSE:BCS) has fallen  53%, Deutsche Bank AG (NYSE:DB)  has lost 50% and Goldman Sachs Group Inc. (NYSE:GS) 33%.

The decline of global bank stocks in the United States,  Europe, even Japan (NYSE:EWJ), is indicative of growing unease. You don’t have strong  stock market rebounds while bank stocks are plunging. It doesn’t happen that  way. Just as in March 2009, they need to stabilize first, showing selling is  exhausted.

Why are banks suffering so much?

Even if gross domestic product (GDP) growth were to end up  at +2% annualized in the United States over the next year, avoiding recession,  that implies employment growth of only around 75,000 per month. With more  people entering the labor market, this implies an unemployment rate drifting up  to 9.5% early next year, and puts the chances of recession at a touch over 50%.

The fundamentals are just as cold underneath as they look on  the surface. The  Organization for Economic Cooperation and Development (OECD) lowered its  fourth-quarter forecast to 0.4% growth quarter-over-quarter for the United  States, 0.0% for Japan and -1.4% for Germany.

Even U.S. President Barack Obama last week said that the  economy had stalled, a stunning admission for a U.S. leader.

All the close-to-the-ground data is confirming this view.

Bond  prices, which love misery, rise when investors sniff out a weakening  economy. That sends bond yields down, and they sank as low as 1.92% this week,  a 60-year low.

Meanwhile the Korean stock market, known as the KOSPI, which has been a great  indicator of future U.S. earnings growth, fell 2.9% last week, and copper sank 12 cents.

The reason all of this is so pernicious is that countries  are trying to reduce their budget deficits at the same time their economies are  contracting, a credit crunch is emerging and social pressures are building  (i.e. anti-austerity riots). These are not environments in which businesses and  consumers go out and spend a lot.

ISI Group  economists have called on the European Central Bank (ECB) to get out in  front of the crisis by cutting rates by 100 basis points, or a full percentage  point, and also launch a 500-billion-euro quantitative easing program.  Liquidity may not really be the problem, but this would show leadership, push  down the value of the overwrought euro (which helps exporters) and possibly  help set a bottom for equity prices.

I rather doubt this will happen, as the Europeans have shown  a stunning capacity for remaining in denial until their backs are against the  wall and the wall is crumbling.

Expect the effects of Greece’s debt issues to linger on the  global economy for quite a while.

Related ETFs:  Vanguard MSCI European ETF (NYSE:VGK), ProShares UltraShort Euro (NYSE:EUO), iShares MSCI Germany Index (NYSE:EWG), iShares MSCI Japan Index (NYSE:EWJ).

Written By Jon D. Markman From Money Morning

Jon D. Markman brings a unique perspective and unparalleled insights to his role as a Money Morning contributor. And with good reason: During the past two decades, Markman has worked as both a journalist/commentator and as an actual portfolio manager. In addition to his contributions to Money Morning, Markman manages The Markman Portfolios, and is the editor of two premium investment research services: Strategic Advantage and Trader’s Advantage.

From 1982 to 1997, Markman was an editor, reporter and investments columnist at the Los Angeles Times. In 1992 and 1994 he was a news editor on staffs that won Pulitzer Prizes, the top award a journalist can receive. From 1997 to 2002, Markman was managing editor of CNBC on MSN Money. Markman is the author of four books, including the bestsellers Online Investing (1999) and Swing Trading (2003). His fourth book – an annotated version of the widely read investment classic, Reminiscences of a Stock Operator – debuted in late 2009. Markman is also the co-inventor on two investment-software patents. A graduate of both Duke University and Columbia University, Markman is a regular guest on radio and television, and at investment conferences – sought out for his insights on stocks, credit and the global economy. Markman lives with his family in Seattle.

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